“There is nothing more
powerful than a market that has changed its mind.” – Art Cashin
On the eve of the 34th Anniversary of the ’87 Crash
let’s put things in perspective. For those who may be unaware, on October 19,
1987 the market suffered its largest single one-day percentage loss (22.6% for
DJIA & 20.5% for S&P 500). It was a day that changed the market forever.
The quotation above is from this morning’s market commentary
from the venerable Art Cashin. With his usual wit and wisdom Art vividly captured
what led to the infamous Black Monday and how the “Plunge Protection Team” (PPT)
rescued the market the next day.
As you can see in the chart here, the PPT was able to stop the
plunge but market volatility continued for the remainder of 1987 – and into
early 1988. In a year like 2021 with S&P 500 up 20.8% year-to-date on September
2 before correcting about 5% “Octoberphobia” invokes fears of crashes and big
selloffs. While some continuing volatility and weakness is to be expected for
the remainder of October what happened in 1987 is not likely to happen in October
2021.
First off the market had been on a tear for three years off
the July 1984 low and DJIA was up 43.6% YTD on August 25, 1987 – a far cry from
the 20.8% this year. This year’s May-September rally of 11.7% pales in
comparison to the 21% jump from May-August 1987. Yes the market has roughly
doubled from the March 2020 Covid low, but the overvaluations, interest rate
and geopolitical scenario is nowhere near as precarious today as it was in
1987.
And furthermore after the 1987 Crash regulators added varying
levels of circuit breakers that will stop trading and close the market if necessary
so that the market is not allowed to drop that much in one day any longer. And the
PPT has evolved to be even more powerful.
But as Art states above the market is powerful force that will
push those circuit breakers to their limits as it did when Covid hit in March 2020,
the “flash crash” in May 2010 and when the bailout plan was rejected in October
2008.
Rising headline inflation, surging energy costs and
persistent supply chain disruptions have the potential to temper equity market
gains here in the near term. And the Fed has accelerated its projected
timetable for interest rate increases. The Fed is also expected to announce
that they will begin tapering bond purchases in the fourth quarter. We
anticipate the Fed will move gradually which will still be a positive for the
market.
Next year is likely to be less bullish as the midterm elections
tend to make the market more vulnerable to economic, monetary, fundamental and
geopolitical headwinds, but for now the strong seasonal tailwinds are like to
lift the market into early to mid-2022. On October 8, we issued
our Seasonal MACD Buy Signal for DJIA, S&P 500 and NASDAQ.